America's Most Overpriced Cities

Mention Hawaii, and most Americans will think of clear blue water and sandy beaches, flower leis, Hawaiian shirts and fruity drinks. People who actually live there may have a more jaundiced perspective.

The median sales price for a single-family home in Honolulu was $430,000 in the fourth quarter of 2013, according to the National Association of Homebuilders. While that’s not the highest in the nation, it still puts the majority of homes on the market financially beyond the reach of families bringing home the median household income in the Honolulu metro area, $86,300. That doesn’t look likely to change. Because developable land is limited, the pace of new residential construction—some 3,000 per units in the entire state per year--is only about half of what the population needs to match its growth rate, says Eugene Tian, chief economist for the research arm of the state’s Dept. of Business, Economics and Tourism.

Lots of places have high housing costs, but add in the outrageous cost of daily necessities in Hawaii and it makes the beautiful island look like a less-than-idyllic place to live. Groceries in Honolulu cost 55.6% more than the national average; utilities 67.9% more, according to Sperling's BestPlaces. “Eighty percent of our food is imported from the mainland,” notes Tian. “Oil is 100% imported. And we are the most oil-dependent state in the U.S., with 87% of our energy depending on oil.”

Add to that the fact that the island is 2,400 miles away from the next land mass, and just try to get a supplier to deliver goods cheaply. The result is few suppliers and monopolies at every level: there’s only one Toyota dealer in Honolulu, and Chevron is the big gorilla oil company (in 1998, the state of Hawaii sued the oil companies for price fixing; oil prevailed noting that federal law outlaws monopolies, not oligopolies.) Local business owners (and home builders) pass on the high import costs, and residents pay through the nose for everything from milk to gasoline. For all these reasons, Honolulu tops our list of America’s Most Overpriced Cities, tying with New York for the No. 1 spot.

Behind the numbers To find the Most Overpriced cities, we started with America’s 100 largest Metropolitan Statistical Areas (MSAs) and Metropolitan Divisions (MDs), all with populations of 600,000 or more. MSAs and MDs are cities and their surrounding suburbs as defined by the Office of Management and Budget.

First we looked at housing affordability, using the Housing Opportunity Index (HOI) from the National Association of Home Builders and Wells Fargo. The quarterly index weighs median prices for homes sold against median income levels to determine the percentage of homes that are affordable to residents making the median income. Due to a lack of sufficient data, Baton Rouge and New Orleans, La., as well as Columbia, S.C.; Gary and Indianapolis, Ind.; Kansas City, Mo.; Little Rock, Ark.; Nashville, Tenn.; and Omaha, Neb. had to be excluded from our results.

Next we considered the cost-of-living index developed by Sperling’s Best Places, factoring in the cost of food, utilities, gas, transportation, medical expenses, and a host of other daily expenses for each area. Cities with a cost-of-living rank above 100 have higher prices for these day-to-day goods than the national average.

Finally, we weighted these factors, in line with the methodology the Bureau of Labor Statistics uses for the weightings of its Consumer Price Index (where housing is weighted just under 32%). Because housing is such an important expense to most people, we tipped the scales a bit higher.

Who says a place is overpriced? Not surprisingly, California has the greatest number of overpriced cities on our list (nine), with San Jose the highest-ranking Golden State metro area (No. 4). In the San Jose-Sunnyvale-Santa Clara MSA, according to NAHB figures, only 26% of homes are affordable to families bringing home the median income of $101,300. (The median home sales price was $625,000 in Q4 2013.) “In areas in California where salaries are high, demand is high, and building activity is restricted, prices are high,” says Cynthia Kroll, chief economist for the Bay Area Association of Governments.

Housing affordability is even worse in San Jose’s northern neighbor, San Francisco, where the median family making $101,200 can afford only 14.1% of local homes (median sales price for Q14 2013: $800,000) according to NAHB data. In fact, that ranks San Francisco dead last in terms of housing affordability among the cities we evaluated for this list. The only reason San Francisco comes out less overpriced than Silicon Valley is that greater San Jose’s lower home prices were offset with higher costs for daily expenses. Groceries are 20% above the national average (compared to SF’s 16.2%), utilities 24.2% (compared to 7.6% lower than the national average in San Francisco); Silicon Valley also has a slight advantages in transportation and health care costs. But we’ll admit that the difference in our scores for these places is fairly minimal.

New York City, not surprisingly, ties with Honolulu for first place and Boston (No. 3) and Cambridge. (No. 8), as well as Peabody, Mass. (No. 7; the Metropolitan Division refers to greater Essex County) make an appearance. But neither Massachusetts nor New York State come close to placing as many cities on our list as California, which may come down to the nonquantifiable factors that draw people to California (and for that matter, Hawaii) in the first place. “Why is land very expensive on the California coast?” asks Stuart Gabriel, director of the Richard S. Ziman Center for Real Estate at UCLA. “Well, because we have awesome weather—we have certain amenities on the California Coast that don’t exist in Des Moines, Iowa.”

And New York has cultural offerings, Boston has universities. So while we call it overpriced--maybe some people would just say "expensive."